Do you have a scalable organizational model?

The organization of the future will be (…) like a Calder mobile, with a thin wire of control, and with modules hanging down of various shapes and colors, each of which is capable of twisting in the wind as the wind changes. And each of which is also capable of being decoupled and disposed of and replaced by some other unit.

– Alvin Toffler

Most organizations have to deal with an uncertain business environment. Some industries are cyclical and go through relatively predictable economic upturns and downturns. Other industries stay stable for a time and then suddenly enter a phase with rapid change. The overall trend is toward greater volatility: Economists have found that recessions occur more frequently now than they did three of four decades ago.

For this reason, a key challenge for leaders is to design robust, flexible, and scalable organizations. At the most basic level, one needs an organization that can easily adapt the internal capacity and volume of output to the external demand for its products and services.

When evaluating your current organizational model, there are two simple questions you can ask:

Can we easily scale it up? Can we – at a fairly low cost and relatively quickly – add (or increase the size of) projects, technology units, or market units?

Can we easily scale it down? Can we – at a fairly low cost and relatively quickly – terminate (or reduce the size of) projects, technology units, or market units?

For the majority of corporations, the answer is no. There are a lot of rigidities – from governmental regulations, labor union agreements, to our own culture, systems and structure – that limit our flexibility and agility.

Of course, every firm can hire and fire people, and that is certainly an important element of scalability. But if your only method for achieving scalability is to downsize when a downturn begins, chances are your firm is in for trouble.

Downsizing is sometimes necessary, but it may also be ineffective in some industries, erode trust among those who remain in the organization, and even fail to reduce costs in some cases (if you want a balanced analysis of this issue, see this article published in an academic journal).

Instead, consider how your organizational model affects scalability.

If your model relies on only a core set of permanent employees and allows business units to easily contract external resources, the fixed cost base can be reduced and more of the cost can be variable. You rent people instead of owning them.

If there’s internal mobility, people can transfer from business areas with less activity to business areas with more activity.

Better still, if a significant part of your people belong to a resource pool and are used to working in temporary projects for several internal units, you already have some built-in flexibility that can be exploited when uncertainty increases.

But scalability is not only an issue in economic downturns. When the economic environment is more favorable, one needs to think about what happens when business units actually do succeed. Once a business unit or subsidiary reaches a certain size, it sometimes forces firms to do a complete reorganization to allow further growth.

To use the metaphor of the Calder mobile – in these cases there are too many wires crossing each other (and too many unique and non-compatible modules), making it difficult to change the configuration without redoing the whole structure.

One reason why many organizations lack scalability is simply that the issue is not even thought about when a new unit (e.g., a subsidiary) is established.

This is particularly a risk if the organization chart is gradually adapted to specific people or circumstances. New matrix reporting lines or hybrid structures are often created on top of the existing structure without considering what will happen if the unit succeeds and is able to grow (or the opposite, if the business must be closed down).

In my experience, the more you “design by compromise” the more difficulty you will have in finding a scalable structure.

To create a scalable model you need to think about the overall organizational architecture from a strategic point of view, and consider how it can support both the current business and adapt to possible future changes.

The model that I call the “modular organization” (developed by the late US professor Russell Ackoff), is by far the most flexible (I briefly explained this model in my previous post).

The key idea is to have relatively small and independent units with standard interfaces, meaning that each unit can transact with any other unit. Ackoff claimed that there would be no need to reorganize anymore once this structure is adopted. Instead of reorganization, you can shift the resource allocation among the units to adapt to external changes.

The next time you discuss possible changes to the organizational model, don’t ask whether you have the right model given your current challenges. Ask whether you have the right model for the future.

About

The purpose of this blog is to provide research based advice for managers who want to design a more effective organization.
I am an associate professor at the Norwegian University of Life Sciences.
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